Structuring Mortgages for Macroeconomic Stability

By John Y. Campbell, Nuno Clara and João F. Cocco

http://d.repec.org/n?u=RePEc:nbr:nberwo:27676&r=dge

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of mortgage borrowers and an infinitely lived risk-averse representative mortgage lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender’s endogenous consumption. We consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this maturity extension option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and is welfare enhancing. The cyclical properties of the maturity extension ARM are attractive to a risk-averse lender so the mortgage can be provided at a relatively low cost.

Cool!

One Response to Structuring Mortgages for Macroeconomic Stability

  1. M.H. says:

    The paper is behind the NBER paywall, thus I cannot read it. The answer to my question may be in the paper.

    If this is such a great design for everyone, why doesn’t it exist in the wild? Regulation? Does this apply just to the US? Does it exist elsewhere? If not, what is preventing it from existing elsewhere, too?

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